Show Me
theMoney
BUDGET-CUTTING STRATEGIES FOR CASH-STRAPPED STATES
ALEC
A M E R I C A N L E G I S L AT I V E E XC H A N G E C O U N C I L
AMERICAN LEGISLATIVE EXCHANGE COUNCIL
Executive Director
Duane Parde
Director of Tax & Fiscal Policy
Chris Atkins
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of state legislators, which is advised by a 21-member Private
Enterprise Board representing major corporate and foundation
sponsors. ALEC’s mission is to discuss, develop and disseminate
public policies which expand free-markets, promote economic
growth, limit government and preserve individual liberty.
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THE MANHATTAN INSTITUTE FOR POLICY RESEARCH
Executive Director of Center for Civic Innovation
Henry Olsen
Author-Senior Fellow
William D. Eggers
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Show Me The Money: Budget-Cutting Strategies for Cash-Strapped States
Copyright © July 2002 by the American Legislative Exchange Council and
The Manhattan Institute for Policy Research. Reprinted November 2002.
All rights reserved.
Order # 0215
Show Me theMoney
Budget-Cutting Strategies for Cash-Strapped States
By William D. Eggers
Senior Fellow, Manhattan Institute for Policy Research &
Director, Deloitte Research
1
It’s the most dire situation we’ve seen in over 20 years. Governors are dealing with unprecedented
fiscal pressure. Even as the economy turns around, the state budget forecast will remain stormy since
revenue growth lags the recovery by at least 12 to 18 months.1
–Raymond C. Scheppach, Executive Director, National Governors Association
I. INTRODUCTION
The National Association of State Budget Officers (NASBO)
and the National Governors Association predict difficult times
in the next 12 months—at least. “It’s worse than anybody
expected,” said Scott Pattison, NASBO’s executive director.
“We already knew that [this fiscal year] was going to be bad,
but now it’s going to be terrible.”4
The 2002 mid-term elections produced nearly two dozen
new governors—the largest turnover in years. They didn’t
have long to celebrate their victories because their first day at
work will coincide with one of the worst state fiscal crises in
decades. By the time they take office, the cumulative 2003
state budget shortfall will likely be over $50 billion.2 The causes
of the deficits are clear: the recession, September 11, spiraling
Medicaid costs, and profligate spending in the mid- and late
1990s.3 Add them all up, and you have the budgetary equivalent
of a perfect storm.
Every one of the myriad campaign promises made by this
year’s group of new governors will have to take a back seat to
closing the budget gaps. Just ask Virginia first-year governor
Mark Warner whose governing agenda has been entirely eclipsed
by his state’s worst fiscal crisis in 40 years. He closed a massive
initial $3.8 billion budget gap through a mixture of mild
spending cuts, some accounting sleight of hand, and by deferring
a planned car tax cut. But, thanks to dismal revenue growth,
in October 2002 Warner was forced to announce another
$855 million in spending cuts. These included lay offs of over
1800 state employees; 15 percent budget cuts in 63 state agencies;
If this gives you a strong sense of déjà vu, do not be surprised.
We have been through all this before, the last time only a decade
ago, during the previous recession. Unfortunately, memories
are short. Many states failed to learn one of the most important
lessons from previous boom-bust cycles: spending must be
contained during growth periods in
order to avoid fiscal imbalances when
States with the largest relative budget gaps
the economy goes south, as it always
FY 2003
does eventually.
Faced with constitutional requirements
to balance their budgets, the governors
and state legislators from Honolulu,
Hawaii, to Augusta, Maine, are scrambling
to find a way out of their budget jams.
Making their task eminently more
difficult is the way in which many
governors and state legislatures looked
the fiscal year 2002 $49 billion collective
deficit square in the face—and punted.
The full panoply of accounting
gimmicks, rainy day fund raids, sin tax
hikes and other short-term measures—
enough to make Jeffrey Fastow blush—
were employed in a desperate attempt to
whistle past the electoral graveyard.
As hard as it is to fathom, budget
problems in fiscal year 2003 will be even
worse than they were in fiscal year 2002.
%
of General
Fund
Amount
(millions)
$16,000
40%
35%
$14,000
35%
$12,000
30%
26%
$10,000
25%
20%
20%
$8,000
16%
15%
15%
15%
13%
$6,000
12%
12%
11%
10%
$4,000
5%
$2,000
$0
0%
AK
NJ
CA
KS
Source: National Conference of State Legislatures
2
MA
AZ
NY
OR
MN
RI
and the closure of all Department of Motor Vehicle offices one
day a week. But even after such painful cuts, Warner says he
may not be through: “Public schools and Medicaid . . . may have
to be cut later on.” As Virginia goes, so goes the nation: for much
of this year’s freshman class, how they handle their first-term
shortfall will dictate whether they’ll have a second term.
business themselves; some expanded their lotteries, while
several others voted to add new gambling locations to reap
more tax revenue.
Many states tried some variety of across-the-board spending
cuts. Four House members in Alaska formed the Crouching
Grouches Caucus to call for such cuts—with a focus on
cutting the expenses of the legislature itself—but, as one
might expect, self-inflicted surgery is never popular.7 Some
states have been forced into temporary shutdowns of major
state activities. Missouri, for instance, delayed sending out
income tax refunds to taxpayers. Indiana Governor Frank
O’Bannon vowed to cut education spending, possibly by
cutting summer school, alternative schools, programs for gifted
students, and full-day kindergarten. Washington governor Gary
Locke eliminated 30 programs and hundreds of state jobs.
The purpose of this study, however, is not to serve up gloom
and doom about state finances; there is already enough of that
to go around. Instead, this study seeks to (1) provide proven,
no-nonsense options that policy makers can employ to address
the staggering budget shortfalls; and (2) lay out some strategies
that go beyond simply plugging budget holes to address needed
medium- and long-term reforms in state finances.
II. WHAT DID STATES DO IN 2002 TO
ADDRESS THEIR BUDGET DEFICITS?
The Midwest, a region particularly hard hit by the economic
downturn, did see some aggressive budget-cutting. Outgoing
Illinois Governor George Ryan proposed over half a billion
dollars in cuts, including closing a medium-security prison,
shutting down a mental health center, reducing college
scholarships, and paring down state aid to schools. In
neighboring Iowa, Governor Tom Vilsak signed a budget that
included furloughs for state workers and eliminated or
suspended 27 state programs. In Michigan, outgoing governor
John Engler cut about $1 billion in discretionary items,
including bilingual education, parenting skills training, and
youth violence prevention programs.
What did most states do in 2002 to address their large budget
deficits? One theme clearly stood out: How little can I get
away with doing? Everyone raided the rainy day fund. Many
states hiked cigarette taxes; some of the same states plundered
the tobacco settlement money. (Of course, the more cigarette
tax hikes reduce demand, the less the states get in tobacco
settlement money.5) Another popular strategy was rifling
through other portions of the budget—education endowments,
transportation funds—hunting for stray money to pay down
the deficit.
Big tax hikes were, for the most
part, politically untouchable
during the heated electoral
season. But targeted tax hikes,
especially “sin taxes,” with their
whiff of social engineering, were
quite popular. Expect to pay more
for your Luckies, your liquor, and
your Lotto in many states. Some
states raised corporate taxes,
perhaps wagering that the
political appeal of taxing the fat
cats will outweigh the economic
damage done by having a
business-hostile state.
Corporations, predictably, fought
back with threats to withdraw
from states that put the bite on
too hard. Illinois lost a major
gambling-barge contract after it
raised casino taxes, creating what
the casino company called an
“unstable environment.”6 Of
course, states are in the gambling
Closing FY 2003 Budget Gaps
State Actions (FY 2003)
Examples
Actions
C utting Spe nding
26
T apping State Funds
23
•
•
•
•
Higher Education: 16 States
Corrections: 14 States
Medicaid: 12 States
K-12 Education: 11 States
• Local Revenue Sharing:
11 States
• TANF: 5 States
• New York: tapped $1.1 billion from a variety of funds.
• Pennsylvania used $90 million from the Capital Facilities
Fund
• Virginia: Diverted one-half cent of the sales tax from the
transportation fund to the general fund for $317 million
Using Tobacco
Settlement Funds
16
• Pennsylvania: Transferred $198.5 million
• New Jersey: Securitized to generate more than $1 billion
Increasing T axe s
16
•
•
•
•
R ainy D ay Funds
• Alaska: Tapped its fund for $842 million
• Ohio: Tapped its fund for $427.9 million
12
R aising Fe e s
• Rhode Island: Raised $90.8 million
• Virginia: Expects to generate $175 million
• Vermont: Raised $10 million from DMV and other fees.
10
0
10
Indiana: Raised taxes by more than $1 billion
New Jersey: Raised taxes by more than $1 billion
Pennsylvania: Raised taxes by more than $1 billion
Tennessee: Increase taxes by more than $900 million
20
30
Number of States
Source: National Conference of State Legislatures
3
40
50
The bottom line: some states made serious
spending cuts, but most didn’t do much to reduce
the medium- and long-term costs of operating
government. This objective can be accomplished by
reducing the size and scope of government in
strategic and imaginative ways, whether by
reorganizing or redesigning departments and
programs. Absent large tax increases, such steps are
now unavoidable.
Closing FY 2003 Budget Gaps (continued)
States Actions (FY 2003)
Actions
Employe e T rav e l R e strictions
9
Employe e H iring Fre e ze s
9
Layoffs
III. TEN STRATEGIES FOR
CUTTING BUDGET DEFICITS
5
D e laying C apital Proje cts
The strategies outlined in this study include short-,
medium-, and long-term plans for reducing the
cost of government. Some of the short-term
measures are imperfect and impolitic and will do
little to fix long-term budget imbalances. In many
states, however, the severity of the current fiscal
situation makes stopgap measures unavoidable.
9
Pay as you go C apital Proje cts to D e bt
5
G aming Expansion
4
0
10
Number of States
It is important to remember that no matter how
Source: National Conference of State Legislatures
successful state governments are in employing
short-term measures to close deficits, the seeds of
smaller workforce; the budgetary impact is also harder to
fiscal crisis will remain. Only by fundamentally restructuring
estimate than with an FTE cap.
government will state policy makers be able to contain
spending growth and return accountability to state finance.
• Reduce the number of government positions: The most
The following ten strategies will help states do both.
direct way to reduce the size of the state workforce is
simply to eliminate government positions outright. In
1 Go Where the Money Is: Reduce Workforce Costs
Florida, Governor Jeb Bush has set a goal of reducing the
One of the most effective short-term cost reduction measures
state workforce by 5 percent a year for five years. Through
is reducing workforce costs. The reason is simple: state
a combination of outsourcing and streamlining, Bush has
employees’ salaries and benefits account for a significant
already cut thousands of permanent and temporary
portion of states’ costs. Most states will find it almost
positions from the state payroll. In Missouri, Governor
impossible to balance their budgets without impacting state
Bob Holden targeted 688 jobs for elimination in his 2002
employees. Fortunately, the innovative use of Web-enabled
budget.11
technology can help to ease the impact of workforce reductions
• Eliminate phantom positions: When agencies and higher
on customer service, while an aging workforce will allow some
education institutions receive funding for a certain
workforce reduction without massive layoffs.
employment level, invariably a percentage of the positions
are never filled. Eliminating these positions is a relatively
Recommendations
painless way to extract workforce savings from agency
• Cap Employment: Agencies hate full-time equivalent (FTE)
budgets. Many of the positions eliminated in Florida fell
employment caps because they restrict their ability to hire
into this category.12
new employees. Nevertheless, FTE caps are a proven way
to trim workforce costs.9
• Provide incentives for early retirement: Offering early
retirement incentives, such as allowing employees to
retire early with full benefits and a severance package,
typically results in a large exodus of state workers, thereby
reducing the workforce without layoffs. For maximum
• Freeze State Hiring: A number of states, including Illinois
and Massachusetts, froze state hiring recently.10 Although
appealingly simple, this approach leaves little room for
agencies to adjust their organization to function with a
4
Recommendations
savings, each agency’s funding should be cut by the same
amount as the total salaries of retiring employees. The
budget bill adopted by the Wisconsin State Senate in 2002
contains such an early retirement package.13 Unfortunately,
early retirement packages also carry some potential
disadvantages. First, if the severance packages are too
generous, they negate potential cost savings. Second, the
best and most qualified employees tend to be the first to
take the packages, which can hurt program management.
• Make across-the-board budget reductions: The simplest
way to address a budget deficit is to impose across-theboard cuts on all state agency budgets. When not
micromanaged, across-the-board cuts allow agencies
more flexibility to determine which expenses are essential
and which are not. The main problem with this approach
is that it penalizes the leanest and most efficient agencies,
since they have less fat to cut. Dozens of states enacted
across-the-board cuts this year and last, including Iowa,
New Jersey, Oklahoma, and Virginia.
• Renegotiate labor contracts: State employee unions
sometimes can be persuaded to make contractual
concessions during severe budget crises rather than face
the prospect of unavoidable layoffs. When former
Philadelphia Mayor and now Pennsylvania Governor-elect
Edward Rendell first assumed office in 1992, he faced a
$208 million budget shortfall, at the time, the city’s worst
fiscal crisis since the Great Depression. To reduce costs,
he proposed numerous work rule changes and cutbacks
in the very generous compensation packages—such as
41 paid vacation days a year—enjoyed by city employees.
After holding firm after the unions walked out of their jobs,
Rendell was able to extract $353 million in concessions
from the unions over four years.14 Most attempts to
renegotiate contracts, however, are not this successful.
Outgoing Illinois Governor Ryan failed in his attempt to
renegotiate union contracts with state employee unions
in 2001.15
• Freeze spending to prior year’s level: Another simple way
to cut spending is to fund agencies at the previous year’s
level.
• Freeze COLAs: Freezing COLAs received by entitlement
recipients can save costs in the short term without
removing people from program rolls. The freeze can be
reversed once the budget picture improves. The only
governor to propose a measure of this type in 2002 is
John Engler of Michigan, whose budget includes a freeze
on Medicaid COLAs.17
3 Modernize Government: Reform Entitlement Programs
States have no chance to solve their long-term budget
problems without getting a handle on the rising cost of
entitlements. Next to the recession, the runaway cost of
Medicaid—the biggest budget cost driver in most states—is
the biggest cause of the current state fiscal crisis. Medicaid
now accounts for one-fifth of total state expenditures, second
only to education.
• Reduce retirement costs: Some analysts question the
fairness of asking current state employees to bear all the
pain of budget cuts. Most states provide generous pension
and health benefits for retired state employees, many of
whom embark on lucrative second careers. In the spirit of
shared sacrifice, states can realize savings by temporarily
freezing cost-of-living adjustments (COLAs) for retirees
or requiring them to pay a larger share of their health
care insurance premiums, as outgoing Governor Lincoln
Almond has proposed in Rhode Island.
For the past two years, Medicaid spending has been growing
at a rate of 11.7 percent per year, almost double the 6.4 percent
increase in state spending projected for the next fiscal year.
The ten-year projections from the Centers for Medicaid and
Medicare Services show double-digit cost increases far into
the future.18 States are experimenting with a variety of
approaches to reduce Medicaid costs: cutting mental health
care; tightening eligibility requirements; reducing payments to
providers; lowering drug costs through generic drugs and
drug rebates; and reducing coverage for acupuncture, podiatry,
dental care, home health care, and chiropractic care. Some of
these proposals make sense. Some will even save money. But
none of them are likely to have more than a marginal impact
on the long-term problem of rising Medicaid costs.
2 Spread the Pain: Impose Broad-Based Spending Cuts
Across-the-board spending cuts are not the best way to
reduce the size and cost of government. They provide little
guidance about what services government should deliver or
how they should be delivered. Moreover, cutbacks are usually
restored as soon as tax revenues begin flowing back into
government coffers, meaning long-term cost reductions are
not achieved.16 But for governments needing to quickly
identify budget savings — with no time to implement a more
strategic process of “rightsizing” and restructuring—acrossthe-board spending cuts are often a necessary weapon in the
budget-balancing arsenal.
The real problem, as noted in an American Legislative
Exchange Council (ALEC) Medicaid study by Richard Teske,
lies in Medicaid’s defined benefits structure, which fixes
5
benefits and eligibility and makes costs variable—a recipe for
skyrocketing costs.19 An in-depth look at Medicaid’s problems
and potential solutions is beyond the scope of this study, but
one thing is certain: sustained Medicaid cost control is nearly
impossible without structural reform. The most promising
reform plans allow consumers to choose among multiple
providers; customize benefits according to patients’ needs and
circumstances; target benefits to the truly needy; and recognize
that the Medicaid population consists primarily of three distinct
groups—older people, blind and disabled people, and lowincome families—each of which needs to be treated differently.20
• Adopt a “pay after performance” model for TANF: In the
years following the passage of the 1996 welfare reform
law, no state experienced larger caseload reductions than
Wyoming, where the number of people on TANF
plummeted 70 percent. The key to Wyoming’s success was
a “pay after performance” policy, which compels TANF
recipients to comply with work requirements and other
provisions of their responsibility agreement before
receiving their monthly grant.23 Grants are automatically
reduced to $1 for TANF recipients who fail to comply
without a legitimate reason. Those who fail to cooperate
for two months see their cases closed.
In contrast to this approach, most states try—usually
unsuccessfully—to impose sanctions on recipients for
noncompliance after they receive their monthly grant.
When enforced, the sanctions are often too weak to greatly
influence behavior. One indication of the magnitude of
savings possible from switching to a pay-after-performance
model is provided by the Texas comptroller’s office, which
estimates that Texas could save about $22 million in
general fund revenues by adopting this approach.24
The large drop in welfare caseloads over the previous six years
has meant that Temporary Aid to Needy Families (TANF)
costs have not been a major budget driver. However, not all
states have embraced welfare change to the same degree: Some
evidence suggests that adopting more far-reaching reforms
may help some states realize significant savings.
Recommendations
• Adopt market-based, consumer-choice Medicaid reform:
Medicaid consumers should be given vouchers or
refundable tax credits to purchase personal insurance
through independent brokers from a variety of stateapproved plans, including medical savings accounts, feefor-service plans, and managed care plans. This approach
would require changes in federal policy, such as turning
Medicaid over to the states. Absent federal legislation,
states could still apply for waivers to implement a
Medicaid consumer choice pilot, as Tommy Thompson
did with welfare reform in Wisconsin.
• Use technology to reduce fraud, abuse, and overpayments:
Right now, billions of dollars’ worth of welfare and Medicaid
benefits go to people who are ineligible for these programs.
“Data brokers” and online eligibility systems can help fix this
problem by instantly verifying the income and assets of
TANF and Medicaid applicants. After years of steep welfare
cost increases, the Canadian province of Ontario recently
modernized its archaic, error-prone eligibility process.
The results have been impressive: the system determined
that 17 percent of all welfare recipients were ineligible
and another 8 percent were being overpaid. Total cost
savings over five years are projected to be $1 billion.25
• If comprehensive Medicaid reform is not possible, reduce
costs through more targeted approaches: A variety of
Medicaid cost-cutting options can be undertaken in the
absence of full-scale choice-based reform, including
implementing home- and community-based alternatives
to institutional long-term care, instituting private
pharmacy contracts to manage drug consumption,
imposing co-payments, contracting for specialized
services, eliminating coverage of optional services, using
buying pools, and changing the service utilization of
existing populations.21
One of the most successful Medicaid reforms has been
instituting disease state management (DSM) programs
for people with chronic diseases such as Alzheimer’s,
asthma, congestive heart failure, diabetes, and HIV. DSM
can reduce costs (e.g., by cutting emergency room visits)
and increase care through the use of customized health
services, including patient education, technical assistance,
and risk management.22
ASKING THE RIGHT QUESTIONS
As states scrutinize their budgets in search of savings
opportunities, three crucial questions should be asked of
all government functions:
1 Should government be doing this at all? (If it is
something that can be done effectively by the private
sector, then the state government should not be
wasting resources and energy doing it.)
2 How can it be done better and cheaper?
3 How can we apply technology to enhance services and
cut costs?
6
4 Turn Capital Assets into Financial Assets:
Sell or Lease Government Assets and Enterprises
The pioneer in this movement was Michigan, which sold its
Accident Fund in 1993 through a public auction process to
Blue Cross/Blue Shield of Michigan for $255 million. One
condition of the sale was that Blue Cross/Blue Shield continue
to offer small businesses workers’ compensation insurance.
A.M. Best, a respected insurance rating firm, now rates the
privatized Accident Fund’s financial condition as excellent.
Several years later, Nevada followed Michigan’s lead. It
privatized its state-run workers’ compensation insurance fund
and opened the market to private insurers.
Over the past two decades, hundreds of billions of dollars’
worth of state-owned enterprises and assets have been sold or
leased to the private sector worldwide. These assets have
included airports, stadiums, ports, utilities, liquor operations,
buildings, land, and gas and electric utilities.
The Los Angeles–based Reason Foundation estimates that cities
and states own over $226 billion in infrastructure assets that
could be sold to the private sector.26 By selling or leasing state
enterprises to private entities, governments can turn dormant
physical capital into financial capital, which can be used for
more pressing needs such as rebuilding decaying infrastructure,
reducing debt, or cutting taxes. State governments can also
benefit financially by putting the assets on the tax rolls. A year
after Connecticut privatized its off-track betting operation in
1993, it was actually netting more revenues (via a 3.5 percent
tax on the company’s gross revenues) than it would have been
making as owner of the operation.27
Recommendations
• Direct a special legislative committee or executive branch
unit to identify privatization opportunities: New York
State was a leader in selling off state assets and enterprises
during the 1990s, including completing the first airport
privatization in the country (Stewart National Airport).
Instrumental to this success was the creation of a unit
within the state’s Empire State Development Corporation
that was devoted to identifying privatization opportunities
and then making the transactions a reality. The
privatization unit sold off a golf course, a hotel, New York
Coliseum, the Long Island Railroad Freight Division, the
14th Street Armory, and 20 surplus mental health
properties. Direct revenues from the sales have amounted
to over $163 million—not to mention the considerable
savings of not having to maintain the properties. Any
group like this is going to generate bureaucratic and
political heat; to succeed, it requires top-level staff with
transaction experience, a commitment to privatization,
and unwavering support from agency heads and state
policy makers, especially the governor.
State asset sales during the 1990s included the trade sale of the
Michigan Accident Fund, the Port Authority of New York and
New Jersey’s Vista Hotel (at the World Trade Center), state
liquor operations, and a number of commercial properties
owned by the state of New York. California realized over $200
million in revenues from the sale of surplus buildings and real
estate during the 1990s. Several governors considered or
proposed the sale of state-owned airports, insurance funds,
turnpikes, and water systems.
Various methods can be employed to carry out such sales,
including auctions, negotiated sales, management or employee
buyouts, and placement with investors. The nature of the sale
determines which method is best. Asset sales must be handled
carefully and usually take a year or more to complete.
• Provide a financial incentive for agencies to turn physical
capital into financial capital: Some agencies are disinclined
to sell nonproductive assets, fearing that any savings will
only reduce their budget. The easiest way to rectify this
situation is to let the agency keep a share of the money
earned from the sale, rather than having all proceeds
revert to the general fund. Another option is to agree to
not reduce an agency’s budget by the full amount of the
operating savings generated.28
The largest state privatizations over the past decade have
involved the sale of state-run workers’ compensation funds.
PRIVATIZATION OPPORTUNITIES
Enterprises: Golf courses, turnpikes, water systems, airports,
hospitals, ports, liquor operations, gas and electric utilities,
liquor store operations, wastewater treatment plants, waste-toenergy plants, dormitory food service.
Assets: Tax liens, loan portfolios, stadiums.
Real estate: Public housing, hotels, surplus lands and
buildings. (Governments at all levels in the United States
own property worth at least $4.5 trillion altogether.)
• Adopt a capital charge system: Most agencies have little
incentive to extract the greatest value from the use of their
assets because the capital cost of land, buildings, and other
assets is not reflected in their budgets. This can be rectified
by assessing a “cost of capital” charge on all assets. A capital
charge essentially applies an interest rate to all capital,
creating an actual cost for using capital. The charge creates
an incentive to balance a capital expenditure against its
7
usefulness in achieving the agency’s goals because
suddenly, the once-invisible costs of land and buildings
become very real to agencies that find themselves charged
for their use.29
ANNUAL COST SAVINGS ACHIEVED FROM
COMPETITIVE GOVERNMENT PROGRAMS
Indianapolis
Los Angeles County
New York City
Philadelphia
San Diego County
State of Virginia
REVENUES FROM SELECTED STATE PRIVATIZATIONS
OVER THE PAST DECADE
California
Michigan
New York
New York
New York
New York
New York
Ohio
Virginia
Surplus buildings and real estate
Accident Fund
14th Street Armory
Long Island Railroad Freight Division
Mental health properties
Radisson Golf Course
Stewart International Airport
Liquor stores
Student loan portfolio
$200M
$255M
$15M
$28M
$62.5M
$3.2M
$35M
$21M
$62M
$46M
$50M
$42M
$38M
$17M
$32M
Sources: Individual city and state governments and
various Reason Foundation publications
high-quality services at low costs. States now use vouchers to
provide a host of services, including day care, recreation,
education, mental health, drug treatment, housing, help for
people with developmental disabilities, and job training.
Sources: Reason Foundation, New York Empire State
Development Corporation
Recommendations
• Do a competition review: Before opening up services to
competition, states need to know what is being delivered
in-house, what is already being contracted out, and what
competitive opportunities exist. Most state governments
do not have this information. The legislature should
require the executive branch to conduct a comprehensive,
government-wide inventory of activities that could be
performed by the private sector. One approach is the 1998
Federal Activities Inventory Reform Act, which requires
federal agencies to catalog the commercial services they
provide and open them to private sector competition.
This program has identified more than 900,000 federal
positions as being commercial and, therefore, potential
competitive opportunities.
5 Apply Antitrust to Government: Introduce
Competition in Service Delivery
Bureaucratic monopolies are bad for taxpayers and public
employees. When government bans competition, it
communicates a message to public workers that state systems
and those who run them are inferior. Competition creates the
conditions for increased productivity and new partnerships in
which the private sector provides some functions while public
employees concentrate on what they do best—and where they
are needed most. By opening up public services to competition
from private providers, states can realize savings and improve
service quality. Private vendors are often able to produce savings
through innovation, advanced technology, and a commitment
to customer service. Once exposed to competition, public
employees will also find ways to reduce their own costs. In
Indianapolis, Mayor Stephen Goldsmith bid out more than
70 city services at an average savings of 20 percent.30
• Mandate that a certain percentage of services be opened
up to competition each year: Simply identifying the
functions that can be competed out does little good if
agencies fail to do anything with this information. Agencies
should be required to compete out a certain percentage
of commercial functions each year. At the federal level,
President George W. Bush has called on federal agencies
to compete at least 5 percent of these positions in 2002,
rising to 10 percent next year and increasing as the
sourcing potential of more positions is assessed.31 The
White House expects savings from competitive sourcing
to range between 20 and 30 percent.32
For many social, health, and educational services, the best way
to realize the benefits of competition is to allow service
recipients to choose their own providers. In addition to
providing greater freedom, choice-based programs bring
consumer pressure to bear, creating incentives for people to
shop around for services and for service providers to supply
8
6 Fund Results: Reduce or Eliminate Programs That
Perform Poorly
INSTITUTIONALIZING COMPETITION
To ensure that competition is not simply a passing fad, a
number of cities and states have established competition
councils to institutionalize the concept throughout state
government. The two oldest and most prominent are
Virginia’s Commonwealth Competition Council and the
Texas Council on Competitive Government (CCG). Of the
two entities, which have each existed for about a decade,
the more powerful is the CCG, which can compel state
agencies to open functions to competition. CCG projects
are also exempt from state procurement laws, a provision
that helps to ensure freedom to pursue creative solutions.
In all, the CCG has saved the state more than $65 million
since its inception.33
There comes a time when every program must be
judged either a success or a failure. Where we find
success, we should reward it, repeat it, make it the
standard. And where we find failure, we must call it
by its name. Government action that fails in its
purpose must be reformed or ended.
—Governor George W. Bush (2000)
Governments typically focus on inputs—measuring the
quality of a service by the amount of money spent providing
it. If crime goes up, police departments receive more money.
If student test scores go down, schools are given more cash.
Poor outcomes lead to more inputs rather than an improved
process.
• Incorporate employee incentives into competition
programs: Agencies or divisions that compete with the
private sector to deliver state services should be allowed
to distribute a portion of any cost savings that result from
winning a competition to the employees who participated
in the process.
Indianapolis city employees pocketed tens of millions
of dollars from competition savings rewards over the past
decade. In response to such incentives, union workers at
Indianapolis Fleet Services, the city agency responsible
for maintaining and repairing the city’s fleet of some
2,500 vehicles, cut their overhead by two-thirds, reduced
the number of managers by 75 percent, doubled the
productivity of their mechanics, established bonus-pay
plans based on performance, and for the first time created
customer-evaluation procedures.34
To reverse these misguided budget incentives, many states
implemented performance measurement and budgeting
systems during the 1990s. The idea was to spell out the precise
outcomes that each department or private vendor is expected
to accomplish and at what cost. Rather than funding asphalt,
trucks, and employee hours (inputs) or even funding a certain
number of repaired potholes (outputs), legislatures would
purchase smooth streets (outcomes). Performance standards
also can be used to evaluate and reward state employees,
enabling managers to tell at a glance whether a certain
division is over or under budget, whether its productivity is
adequate, and what areas need improvement.
With a few exceptions, performance budgeting has not
worked nearly as well in practice as in theory. One of the main
stumbling blocks is a legislative reluctance to incorporate
performance information into the budgeting process. A
recent survey found that nearly all states have a performance
measurement system in place but only 21 report that
performance information influences the legislature when
making policy choices.35 This is unfortunate because, if done
correctly, results-based budgeting and management can be a
powerful tool for eliminating wasteful government spending. In
Washington State, for example, to better assess which programs’
funding should be reduced or increased, the state budget
office is asking for outcome descriptions to be added to each
agency activity. Another promising approach is the program
assessment process being developed at the federal level by the
Office of Management and Budget (OMB, see box).
9
Recommendations
PRESIDENT BUSH’S ACCOUNTABILITY BUDGET
• Grade program performance: The Bush administration’s
fiscal year 2003 budget contains an OMB scorecard that
grades each federal agency on how well it manages its
operations. Green dots signify that nearly all management
goals had been met; yellow dots, that some had been met;
and red dots, that substantial improvement was necessary.
In 2002, over 75 percent of the OMB’s grades were red dots.
Simplistic? Sure, but it got the point across, especially
once the president began referring to the grades in budget
meetings with his cabinet secretaries and the grades were
published in newspapers all over America. A similar
approach would help states to engage citizens in the budget
process and prod agencies to improve their performance.
President George W. Bush’s primary budget reform initiative
is to link funding to performance for scores of federal
programs. The idea is to get legislators and interest groups to
focus less on how much each program’s funding has increased
over last year’s base level, and more on what the program
has actually accomplished. The goal, says OMB director
Mitch Daniels, the architect of the new budgeting approach,
“shouldn’t be merely how much, but how well. There are
plenty of places to reduce spending when you separate the
effective programs from the ineffective programs.”
Programs that the OMB rates “ineffective” are slated to get
reduced, or axed entirely, while programs rated “effective”
will see their budgets boosted. For instance, Bush’s budget
recommends that the U.S. Department of Agriculture’s
(USDA’s) $80 million watershed program be shut down.
Why? Of the three federal agencies that build dams for
farmers—the Federal Emergency Management Agency,
the Army Corps of Engineers, and the USDA—the USDA
is the worst performer. And dam building for farmers is
hardly the only case. There are 48 different federal job
training programs, a third of which reside in the
Department of Labor.
• Buy outcomes from high performers; reduce or eliminate
payments to poor performers: If results-based budgeting
is to be more than an academic exercise, there must be
rewards for good performance and real consequences for
poor performance. Programs that do not work should be
reduced, eliminated, restructured, or consolidated into
programs that do work. The best way to do this is to develop
common evaluation measures for programs performing
similar work and then compare performance based on
effectiveness and efficiency. After comparing programs’
performance, lawmakers can buy outcomes from the high
performers and cut payments to the low performers.
Until recently, Texas had two large job training
programs located in two different agencies whose
functions and clientele overlapped.36 In 2000, several
independent performance evaluations of the programs
demonstrated conclusively that one of the programs
achieved much better results than the other, which was
plagued with financial and operational problems.37
Rather than expend significant taxpayer resources trying
to “fix” the poor performer, the legislature simply
eliminated it, saving the state $25 million per year.38
OMB is also developing uniform evaluation metrics, or
“common measures,” for scores of cross-cutting,
governmentwide functions that are performed by multiple
agencies: job training and employment, low-income housing
assistance, flood mitigation, and so on. The common
measures for evaluating performance will enable OMB
and Congress to compare the efficiency and effectiveness
of these programs on an apples-to-apples basis.
Job training programs, for example, could be compared
on the basis of outcome and efficiency measures like
attainment of a job, earnings gains, or total program cost
per placement. In a results-based government framework,
the least effective and efficient job training programs
based on the measures might be consolidated into the
high-performing programs or eliminated outright.
• Tie funding for higher education institution to
performance: To balance budgets, a number of states are
reducing their support to higher education institutions.
However, instead of just mindlessly cutting college and
university budgets, state legislatures should use this
opportunity to rethink their whole approach to higher
education. Because much of their funding comes not
from state legislatures but from tuition fees, research
grants, and endowments, state colleges and universities
should be given more freedom to set tuition rates and
exempted from various state procurement and personnel
regulations.39 Such freedom is necessary for them to
thrive in the increasingly competitive marketplace of
Source: William D. Eggers, “The Accountability Budget,”
Wall Street Journal, February 4, 2002.
10
higher education. In exchange for this freedom, however,
legislatures should require greater accountability. Some
states, such as Tennessee, tie a percentage of higher
education funding to meeting certain performance
measures, such as undergraduate degrees awarded,
administrative costs, and use of tenure-track faculty in
teaching undergraduates.
New Zealand has made the most progress in tying pay
to performance. “Jobs for life” have been replaced by fixedterm employment contracts. Each year, a performance
agreement for the chief executive is developed in parallel
with the budget. The agreement states the outputs for
which the chief executive will be held accountable as well
as dimensions of the financial performance. At the end of
each year, the agreement is reviewed to determine the
appropriate action—for example, whether bonuses should
be awarded or employment terminated. Typically, at least
10 to 15 percent of each chief executive’s salary depends
on performance, and a bonus of up to 20 percent can be
earned for superior performance.40 In turn, chief executives
typically require performance agreements from their senior
managers, who do the same for those working under
them—creating a pyramid of performance agreements
that become powerful levers for driving change downward.
A more radical approach is suggested by Ohio
University economist Richard Vedder: tie public officials’
salaries to the size of government. “What if law or
constitutional provision permit[ted] the payment of
substantial cash bonuses to all legislators, statewide officials,
high level political appointees and judges if spending is
reduced below 18 percent of personal income?”41 The
answer: spending would almost certainly be reduced.
7 Change the Incentives: Reward Employees for
Saving Money
Most public employees are smart, industrious people who
work in ways that are consistent with the incentives and
rewards in their workplaces. Unfortunately, traditional
compensation systems treat all employees the same, giving
workers little incentive to increase efficiency and may even
reward inefficiency.
There are a variety of ways to link pay to performance,
including performance contracts, performance bonuses,
shared savings, gain sharing, and productivity awards. In
addition, step-pay raises and COLAs can be eliminated. One
of the best strategies to realize budget savings and begin the
transition to pay for performance is by providing financial
rewards for employees, teams, and divisions for saving money.
Recommendations
• Replace longevity pay with performance pay: In many
states, employees get an extra $50 or $100 a month based
on nothing other than how many years they have been
showing up for work. Such “longevity pay” penalizes
some state employees at the expense of others, provides a
disincentive for young people who do not necessarily
want a career in government, and sends the message that
the state cares more about time served than quality of
work. Replacing longevity pay with performance bonuses
could save money in the short term and, more important,
send the message that results are valued most.
• Establish an employee incentive and gain-sharing
program: Statewide employee incentive and gain-sharing
programs do not generally have huge budgetary impacts,
but they do help promote a culture of innovation,
provide incentives to save money, and achieve some
bottom-line cost savings. The Texas Incentive and
Productivity Commission, for example, has saved Texas
taxpayers more than $66 million—$34 for every dollar
invested in the commission over the decade. These
savings have been generated through a suggestion system
and a group incentive pay program; both programs
reward state employees who offer creative ideas for
improving productivity and saving money.
8 Get Rational: Reduce Duplication and Overlap
Duplication and overlap in government cost taxpayers billions
of dollars. When Mark Forman, the Bush administration’s
e-government czar, began looking into duplication and overlap,
he found that each of the federal government’s 32 lines of
business—ranging from delivering welfare to operating parks—
is performed by an average of 19 agencies. Not only is there
massive program duplication, but also tremendous redundancy
in administrative systems (e.g., the 18 different payroll systems
within the federal government).42 According to Forman, this
kind of duplication at the federal level costs taxpayers at least
$9 billion in redundant information technology (IT) costs alone.
At the state level, the Raleigh-based John Locke Foundation
• Tie bonuses to meeting budget reduction targets: Tying
employee bonuses directly to their success or failure to
meet budgetary targets can provide a powerful incentive
for departments to cut costs. The legislature could simply
allow, for example, employees of a given agency or division
to keep 10 percent of all baseline savings. Already, public
works department employees in Portland, Maine, receive
between $100 and $250 for reducing construction costs
by 10 percent or more. In Charlotte, North Carolina, all
city employees get a bonus if the budget comes under a
certain savings target.
11
This was the situation Jeb Bush confronted when
he became governor of Florida. There were 200 different
IT groups, 150 state Web sites, 23 data centers, and no
central IT standards or statewide coordination. By
centralizing all IT authority and employees under one
State Technology Office, Florida generated large cost
savings—over $11 million in the first year alone—from
increased efficiency and economies of scale. In Pennsylvania,
the budget office and the chief information officer work
together to prevent redundant IT spending by leveraging
the budgeting process to force agencies to collaborate on
IT systems.
found that North Carolina could save at least $60 million by
merging agencies and departments with overlapping functions.43
Higher education is one area often rife with duplication and
overlap. In most states, too many colleges and universities are
doing too much of the same thing. “There is no need to have
13 Ph.D. programs in history,” an Ohio Senate staffer told
Governing magazine. “Maybe we’re better served to have two
in the state, one in the north and one in the south . . . We
want to start to specialize, especially in graduate education.”44
Most people accept that duplication and overlap exist. Doing
something about them is quite another matter, given the fierce
opposition that always accompanies attempts to restructure
government. As Steve Kolodney, the former chief information
officer of Washington State, rightly notes, “Public institutions
have not been created over very many years, simply to lose
their identities, their constituencies and all of their traditional
purposes.”45 Consolidation and rationalization are not easy,
but with sufficient political will they are possible.
• Consolidate state data centers: Governments are also
realizing multimillion-dollar savings from shutting down
and consolidating large, mainframe-based data centers. In
the past few years, New Jersey went from six data centers
to one and South Carolina from 11 to one. Pennsylvania
outdid both going from 18 data centers to one and saving
about $140 million over five years. “We want to free up
both cash and staff resources and to redirect them toward
new technologies,” says Curt Haines, a manager for the
state’s computer services division.46
The first step is to identify the duplication and overlap. The
best way to do this is to determine the main lines of business
performed by government—delivering health care, managing
assets, incarcerating criminals, offering job training, and so
on—and then figure out which agencies provide each service.
Typically, when policy makers develop business process maps
they discover that multiple agencies are involved in each function
or business process.
• Consolidate certain small agencies: Agencies with fewer
than 100 employees often find it difficult to carry out
administrative support functions such as accounting and
budgeting, purchasing, and human resource administration.47
Consolidating entire agencies or the administrative
functions of small agencies offers the potential of cost
savings and improved performance. In 1996, Michigan
consolidated the regulatory functions of the state’s former
Departments of Commerce and Labor with those of a
number of other agencies to form the Department of
Consumer and Industry Services. The consolidation
resulted in cost savings, streamlined services, and better
customer service.
Recommendations
• Use results-based budgeting to reduce redundancy: The
least politically explosive and most objective way to push
through consolidation and rationalization is to use the
performance-based approach described in Strategy Six.
If three different agencies, for example, are involved in
energy conservation, administrators would first develop
common measures of performance for energy conservation
and then compare the performance and unit costs of the
agency programs. The least efficient and worst-performing
programs would be eliminated or merged into the best
program.
• Merge business functions in some school districts. In most
states, only about half of every dollar spent on education
ever makes it into the classroom. One culprit: the exorbitant
per capita costs experienced by many small school districts
that choose to provide their own information technology,
finance, bus, food and, security services. Most of these
support functions could easily be standardized and
streamlined. Economies of scale could be gleaned from
consolidating them into regional service centers serving
multiple districts—at a significant cost savings.
In Texas, for example, there are three transportation
cooperatives that provide bus services for multiple school
districts. One of these, the Bowie County Transportation
cooperative, provides bus services for 13 districts in
• Adopt an enterprise approach to IT spending: Most
governments are spending more than necessary on IT
but not spending enough on e-government. Lacking
coordination on IT spending, each agency buys its own
expensive hardware and software systems. This not only
wastes money but typically results in islands of
incompatible systems that cannot communicate with
each other.
12
Despite the obstacles, there are proven ways to extract cost
savings from e-government and IT—for governments with
the political will to do so. Under the aegis of its EMPOWER
Kentucky initiative, Kentucky realized $140 million a year in
cost savings and revenue gains from using technology to
reengineer the state’s business processes.
Bowie County through interlocal agreements with each
district. The cooperative is run by a board, comprised of
superintendents for each of the districts, which establishes
policy and operational procedures. The cost-per-mile
achieved by the Bowie County cooperative is far lower
than the state average for bus transportation. Meanwhile,
Dallas County Schools provides media, information
technology, psychological counseling and student
transportation services to 15 independent school districts
in the Dallas area. Such shared-services models could be
used for a host of other school business functions (see
box below).
TEN WAYS E-GOVERNMENT CAN SAVE STATES MONEY
1
2
3
4
5
6
7
8
9
10
SCHOOL DISTRICT SHARED-SERVICES
OPPORTUNITIES
m
m
m
m
m
m
m
m
Facilities Use and Management
Asset and Risk Management
Financial Management
Purchasing and Warehousing
Food Services
Information Technology
Transportation
Safety and Security
Reduced workforce costs
Higher employee productivity
Reduced paper costs
Reduced processing costs
Better supply chain management
Better prices on goods and services
More efficient markets
Reduced travel and training costs
Reduced fraud and abuse
Lower building and property costs
Recommendations
• Require agencies to procure most goods and services online:
Every year, states spend billions purchasing goods and
services, using notoriously inefficient paper-based
procurement systems. According to a state of Texas study,
governments spend 5.5 percent of procurement budgets
simply on processing costs.49 If done correctly, moving
procurement online can increase competition, speed up
transactions, reduce administrative costs and staff time,
consolidate purchasing, and drive down prices. To speed
the transition from paper-based to digital purchasing,
Florida, North Carolina, and a host of other states have
mandated that state agencies ditch their archaic paper-based
purchasing systems and use enterprise-wide e-procurement
platforms.
9 Take the Cost Out: Use Technology to Slash Overhead
The private sector is finally starting to see verifiable cost savings
and productivity increases from IT investments. Cisco Systems
is netting about $825 million annually in e-commerce savings,
half of that from Web-enabling its supply chain and providing
vendors and business partners with integrated ordering tied
directly into Cisco’s back-end systems. IBM has claimed even
greater savings—$1 billion annually—from shifting nearly all
its business processes to the Web.48 Not to be outdone, Oracle’s
Larry Ellison says his company is saving a cool $2 billion a
year by moving training and customer service online and using
the Web to consolidate databases and information systems.
Such savings typically represent permanent reductions in the
cost of doing business.
• Reduce procurement budgets by 2 to 5 percent to reflect
savings from e-procurement: Several state governments—
and scores of private firms—have achieved cost savings
by moving purchasing online. Pennsylvania, for example,
has saved more than $13 million in commodity costs since
1999 by conducting online “reverse auctions,” in which
sellers compete to offer the lowest prices on commodities
or services.50 By improving the flow of information
between buyers and sellers, reverse auctions and other
forms of e-procurement can make markets more efficient,
increase competition among suppliers, and reduce the
costs of doing business with buyers. Anticipating economic
dividends from online purchasing, in 2001 Virginia reduced
each agency’s procurement budget by 5 percent.51
Such savings have so far proven illusory for state governments.
There are many reasons: the savings do not come overnight,
they are not always easy to identify (they are embedded within
processes, activities, and programs), getting to the savings
involves some pain (i.e., some public employees could lose
their jobs), and tight budgets mean that huge capital outlays
to fund the e-governments of the future are not in the cards.
13
SAVING MONEY BY WEB-ENABLEMENT
Organization
Process Web-Enabled
Estimated Cost Savings
Cisco Systems
Cisco Systems
DoD Financial & Accounting Service
DuPont
Honeywell
IBM
IBM
IBM
Oracle
Shell Oil
State of Pennsylvania
Supply-chain management
Financial Reporting
Reverse Auctions
E-procurement
Travel booking
Training
Customer Service
E-procurement
Customer Service
Knowledge Management
Reverse Auctions
$412.5M
$86M 52
$2.1M
$200M 53
$4M54
$395M 55
$750M 56
$270M
$550M 57
$200Ml 58
$13M 59
10 Arm for Battle: Create Cost-Cutting Brigades
• Save money by letting customers serve themselves: Letting
customers help themselves via self-service transactions
on government portals allows states to reduce costs and
improve customer service. Leading private companies are
experiencing huge cost savings from shifting millions of
customer calls to self-service Web transactions. By moving
35 million customer service calls to a Web-based selfservice environment, IBM saved $750 million in 2000.
Every service call handled through ibm.com instead of a
customer representative saves between 70 and 90 percent.
The best near-term opportunity for governments to
achieve hard cost savings from self-service Web transactions
is by digitizing internal functions such as finance, training
and human resources (HR) management. The State of
Florida estimates it will save $24 million a year by Webenabling and outsourcing its HR, payroll, and benefit
administration functions now serving 135,000 employees
across 30 agencies. Florida’s HR outsourcing and
technology enhancement initiative will also allow it to
reduce the number of employees delivering HR services
by 1,000 FTEs.
When Texas was facing a massive state budget deficit in the
early 1990s, the state political leadership assembled over
100 of the best budget analysts, auditors, and number crunchers
in Texas government and gave them a single mission: get us
out of this budget crunch! In five months, the team came up
with over 1,000 recommendations and identified over
$2.4 billion in budget savings, ending the budget crisis and
averting the need to impose a state income tax. The success
of the review gave rise to the Texas Performance Review, a
biennial review of Texas government that has resulted in
$13.1 billion in savings and gains to state funds since it was
launched in 1991.
Every state should have a powerful independent agency that
conducts periodic, top-to-bottom reviews of state programs,
agencies, and departments and makes recommendations to
maintain, eliminate, redesign, or restructure them. There are
advantages to establishing such entities:
• They provide a permanent counterweight to the inertia
and resistance to change inherent in government.
• Use technology to cut fraud, waste, and abuse: Billions of
government dollars each year are wasted because of
overpayments, false claims, and outright fraud. Neural
networks, data mining, and other computer technologies
can make it much easier for governments to detect and
reduce fraud and erroneous payments. Another promising
fraud reduction model is audit recovery programs. A
division in the U.S. Department of Defense that makes
commodity purchases of about $4.9 billion a year has
recovered $111 million over the past seven years, and
$24 million last year alone, by using recovery audit
techniques.
• They build institutional knowledge. Performance review
analysts get to know where all the bodies are buried.
Many years of conducting program reviews enables them
to go head to head with agencies during legislative
testimony and member briefings.
• Legislative committees and state budget offices are easily
sidetracked by other priorities and typically lack the
dedicated resources needed to lead a transformation
initiative.
To be sure, most states already have some kind of performance
auditing function in place. These generally fall into three
categories: (1) one-time, comprehensive program reviews of
14
RESULTS FROM LEADING STATEWIDE PERFORMANCE REVIEWS/BLUE-RIBBON COMMISSIONS
Review Initiative
Estimated Cost Savings/Cost Avoidance/Revenue Gains
EMPOWER Kentucky (1996–2001)
E-Texas/Texas Performance Review (1991–)
Illinois Statewide Performance Review (1999–)
New Century Colorado (1999–2000)
Pennsylvania IMPACT Commission/PRIME (1995–)
$140M (annual)
$13.1B
Not calculated
$41-49M61
$600M
the entire state government; (2) regular periodic options reviews
of agencies and functions; and (3) sunset commissions.60 But
in only a handful of states are these entities specifically charged
with identifying cost savings opportunities, and in even fewer
states do they have enough clout to have much impact on the
budget process.
through outsourcing, public-private partnerships,
reengineering, and better use of information technology.
Performance reviews conducted by outside organizations
can help uncover such cost-savings opportunities. The
two most successful school performance review processes
are in Florida and Texas.
In Florida, each school district must undergo a best
financial management practices review every five years.
The reviews are conducted by the state legislature’s Office
of Program Policy Analysis and Government Accountability
(OPPAGA) with the help of outside consultants. Nearly
two-dozen of these school performance reviews have
been conducted since 1997.
The longest-running school performance review
process is in Texas, where since 1991, the Texas School
Performance Review, operated out of the State Comptroller’s
office, has conducted more than 60 audits of school districts
serving over 1.4 million students. The reviews have
identified a total net savings of more than $600 million
through better business practices. Typically nine out of
every ten suggestions made by the performance review
team are ultimately adopted by the school districts.
Success requires strong legislative and executive support, firstrate analytical capabilities, the authority to compel agencies to
turn over data, and some insulation from parochial political
interests. Texas probably has the most robust independent
review capabilities of any state. The Texas Performance Review,
(now called “e-Texas”) the Texas Sunset Commission, and the
200-person-strong State Auditor’s office all have considerable
clout with the Texas state legislators, as well as other powerful
state leaders, who are needed to champion their recommendations.
The legislative and executive branches take notice when all
three forces join together in support of eliminating or
restructuring a state program.
Recommendations
• Establish and/or strengthen periodic performance and
program reviews: One-shot performance reviews, whether
conducted by blue-ribbon citizen commissions or state
employees, are helpful for identifying some cost savings
and opportunities for improvement, but without followup they will do little to change the culture of government
over the long term. States need an ongoing capacity to
drive continuous improvement, innovation, and cost
savings in government. States without performance
review capabilities should establish them; states with such
capabilities should look for ways to strengthen them.
• Establish and/or strengthen sunset review processes: Nearly
half of all states have established a process for regularly
assessing and “sunsetting” programs. Unfortunately, in
all but a handful of states, the sunset process has little or
no impact on budget negotiations, and programs are
almost never actually “eliminated.” This has left a general
feeling that sunset processes have failed to live up to the
expectations of their original backers. But this does not
mean that sunset commissions cannot work; they just
need the right combination of structure, resources,
legislative backing, and executive branch cooperation.
Since 1982, for example, the Texas Sunset Commission,
a branch of the Texas legislature, has abolished 43 agencies
and consolidated another 10, saving the state over
$630 million. Moreover, thanks to the permanent
existence of a powerful legislative sunset committee, the
bulk of the commission’s recommendations end up
becoming law.
• Establish performance review processes for school districts
and higher education institutions: Tremendous cost
savings are possible by taking a microscope to the
business operations of school districts and colleges and
universities. Each state university campus, for example, is
typically the size of a small city, doing everything from
managing student housing and running bookstores to
operating huge capital plants. These types of business
functions lend themselves well to increased efficiencies
15
IV. TOWARD A MORE STABLE
FISCAL FUTURE
Before contemplating any massive changes in state tax
structures, policy makers need to squarely address the
expenditure side of the equation by reducing the cost of state
government. They should use the fiscal crisis as an
opportunity to make needed, albeit politically difficult,
reforms to state programs and processes. The dozens of
strategies and recommendations outlined here—from
reforming entitlement programs to thinning the ranks of state
employees—can help not only cut costs but transform state
government. What is needed are political leaders willing to
make tough decisions and invest their time, staff resources,
and, most important, political capital in the difficult task of
reforming government.
Piling up more debt, using short-term accounting gimmicks,
and implementing targeted tax increases might get some
states through the current budget crisis. However, by pushing
today’s costs into tomorrow’s budgets, state lawmakers are
just prolonging the misery. Worsening structural imbalances
between revenues and expenditures mean that many states
can expect hard times throughout the next decade. “States are
going to have to rethink how they finance their budgets in the
future,” says Claire Cohen, vice chairman of Fitch, a creditrating agency. “Their problems haven’t ended.”62 Some of this
decade’s most contentious debates are likely to revolve around
proposals to address these problems, whether by broadening
the tax base, introducing a state income tax (in those states
without one), or trying a variety of other approaches.63
16
ABOUT THE AUTHOR
ACKNOWLEDGEMENTS
William D. Eggers is a Senior Fellow at the New York–based
Manhattan Institute for Policy Research; a Director of
Deloitte Research, the research arm of Deloitte Consulting;
and an appointee of the Office of Management and Budget’s
Performance Measurement Advisory Council (PMAC). A
nationally recognized expert on government reform, for over
a decade he has written and advised policy makers on issues
such as government efficiency, e-government, privatization,
civil service reform, and government performance. He is the
former project director for e-Texas, a state initiative charged
with developing recommendations to save tax dollars, increase
the use of technology, improve customer service, and inject
private sector competition into state services. Mr. Eggers
also served as a commissioner for the Texas Incentive and
Productivity Commission, a designee on the Texas Council
on Competitive Government, and chair of the Government
Reform Policy Committee for then-governor George W. Bush
during his presidential campaign. He is the 1996 winner of
the prestigious Roe Award for leadership and innovation in
public policy research. Mr. Eggers is also the coauthor of
Revolution at the Roots: Making Our Government Smaller,
Better, and Closer to Home (Free Press, 1995) for which he was
given the 1996 Sir Anthony Fisher International Memorial
Award for the book “making the greatest contribution to the
understanding of the free economy during the past two years.”
A number of the ideas presented here were gleaned from
several years working for the State of Texas’ e-Texas initiative
(formerly called the Texas Performance Review). As such, the
author would like to thank Texas Comptroller Carole Keeton
Rylander, Deputy Comptroller Billy Hamilton and the staff
members of e-Texas for their keen insights into the extremely
difficult process of making government less costly and more
efficient.
Thanks also to Manhatten Institute research associate,
Eve Tushnet, who helped research section II of this study.
Additional Resources and Suggested Reading
“Crisis in State Spending: A Guide for State Legislators,”
American Legislative Exchange Council, January 2002,
http://www.alec.org
“Mid-Year Review of State Budget Policy,” American
Legislative Exchange Council, July 2002
Texas Performance Review and e-Texas Reports:
http://www.window.state.tx.us/tpr/tpr.html
Contact Ruthie Ford, Manager; ph: 512-463-4263, email:
[email protected]
New Century Colorado Report:
http://www.state.co.us/gov_dir/govnr_dir/nccfinalreport.htm
Mr. Eggers can be contacted by e-mail at
[email protected].
National Association of State Budget Officers (Various
Reports): http://www.nasbo.org/. Contact: Scott Pattison,
Executive Director, 202-624-5382.
State of Illinois Office of Statewide Performance Review:
http://wwww.state.il.us/gov/preview/default.cfm
William Sherman, Vice President, Privatization Group,
Empire State Development Corporation, State of New York:
ph: 212-803-3680; email: [email protected].
William D. Eggers and John O’Leary, Revolution at the Roots:
Making Our Government Smaller, Better and Closer to Home,
(New York: Free Press, 1995).
David Osborne and Peter Plastrik, The Reinventor’s Fieldbook:
Tools for Transforming Your Government (San Francisco:
Jossey-Bass, 2000).
17
Footnotes
1
Robert E. Pierre, “Slump Is Still Taking
Toll on State Budgets,” Washington
Post, May 17, 2002, p. A12.
2
“State Budget & Tax Actions 2002,”
National Conference of State
Legislatures, October 11, 2002,
http://www.ncsl.org/programs/
fiscal/presbta02.htm.
3
The economic downturn caused tax
revenues to decline and demand for
government programs to rise. Tax
revenues, which grew 8 percent in
2000 and 6.5 percent in 2001, declined
by 14 percent in 2002. Personal income,
corporate income, and sales tax
revenue growth were all considerably
slower than in recent years, while
capital gains tax revenues plummeted.
The September 11 attacks forced
states to make major unanticipated
investments in public health and
security services. Medicaid, which now
accounts for more than 20 percent of
total state spending, jumped 11.6 percent
each of the past two years. States also
spent lavishly in the 1990s, creating
hundreds of new programs and
locking in ever higher continuing
costs. By 1999, state government
spending was a higher percentage of
the gross domestic product than ever
before.
4
Craig Timberg and Michael D. Shear,
“Falling Tax Revenue Trips Budget
Alarms,” Washington Post, June 27,
2002, p. A1.
5
As of July 1, 2002, 15 states had
raised their cigarette taxes in fiscal
year 2002, and more than a dozen
others were considering doing so.
American Legislative Exchange
Council, Mid Year Review of State
Budget Policy, July 2002. At least
12 states have securitized their
tobacco settlement money by selling
bonds to investors in exchange for a
one-time payment that can be used
to balance the books. Robert E.
Pierre, “Tobacco Tempts States in
Financial Need,” Washington Post,
June 30, 2002, p. A3.
6
Don Babwin, “Company blames tax
increase for scrapping expansion plans,”
The Associated Press, June 18, 2002.
7
The caucus suggests the following
cuts: cutting legislative costs, possibly
by shortening sessions or cutting
salaries and office costs; cutting
25 percent from salaries of appointed
state workers who earn more than
$60,000 per year; cutting or
eliminating services such as public
broadcasting, parks and recreation,
libraries, museums, municipal
assistance and revenue sharing, and
state funding for extracurricular
activities; limiting travel budgets by
relying on teleconferencing and
videoconferencing; and raising the
eligibility bar for Denali KidCare.
8
As of May 9, 2002, ten states—Iowa,
Michigan, Minnesota, Mississippi,
New Jersey, North Carolina, Rhode
Island, Utah, Vermont, and
Washington—had cut local revenuesharing dollars to balance fiscal year
2002 budgets. Another seven states—
Arizona, Iowa, Mississippi, Rhode
Island, Tennessee, Utah, and
Vermont—have proposed similar
actions in 2003, according to the
National Conference of State
Legislatures.
9
John Sharp, Disturbing the Peace:
The Challenge of Change in Texas
Government, The Texas Performance
Review, Comptroller of Public Accounts,
December 1996, chapter 7, p. 1.
10
State Budget Update, National
Association of State Budget Officers.
11
Ibid.
12
Diane Rado and Shelby Oppel,
“Bush Budget Cuts Jobs, Taxes,” St.
Petersburg Times, January 18, 2001,
p.A1.
13
Amy Rinard, “Ellis Slaps Both Parties
Over Budget Bills,” Milwaukee Journal
Sentinel, April 14, 2002, 02Z.
14
William D. Eggers and John O’Leary,
Revolution at the Roots: Making Our
Government Smaller, Better and Closer
to Home, (New York: Free Press,
1995), p.154.
15
“Governor Says Temporary Layoffs
Might Be Considered to Solve Crisis,”
Associated Press State & Local Wire,
February 7, 2002.
16
William D. Eggers, “Rightsizing
Government: Lessons from America’s
Public-Sector Innovators,” Reason
Foundation How-to Guide #11,
January 1993, p.2.
17
Chris Christoff and Wendy
Wendland-Bowyer, “Engler’s Budget
Drains Surplus,” Detroit Free Press,
February 8, 2002, 1A.
18
Centers for Medicaid and Medicare
Services, National Health Expenditure
Projections 2001-2011, March 2002,
p. 5. The largest component of
Medicaid spending, prescription
drugs costs, is projected to grow by
an average of 12.7 percent annually
until 2011.
19
See: Richard Teske, “Abolishing the
Medicaid Ghetto: Putting ‘Patients
First,’” in The State Factor, American
Legislative Exchange Council, April
2002.
20
Ibid, pp.13-17.
21
Carole Keeton Rylander, “Smaller,
Smarter, Faster Government:
Recommendations of the Texas
Comptroller,” e-Texas report, issue
HHS-20, vol. 2, pp. 137-257.
22
Ibid, pp. 195-197.
23
Ibid, p. 240.
24
Ibid, p. 244.
25
Mark Elleoff, partner with
Accenture, interview with the author,
June 2002.
26
Robert Poole et al., “Mining the Public
Balance Sheet: What Cities and States
Have to Sell,” Reason Foundation
Policy Study No. 139, August 1992.
27
George Wandrak, deputy executive
director of the Connecticut Division
of Special Revenues, speech in
Hartford to the Yankee Institute,
September 1994.
28
Bill Sherman, Empire State
Development Corporation, state of
New York, interview with the author,
July 2002.
29
This conclusion, however, is subject
to the proviso that the difficulty of
obtaining new capital provides
some incentive not to return capital.
Some departments believe that it is
preferable to retain the capital on a
balance sheet and incur the capital
charge, in order to avoid going through
a rationing process at a later point when
a capital injection may be required.
30
The Entrepreneurial City: A How-To
Handbook for Urban Innovators, (New
York: Center for Civic Innovation,
Manhattan Institute for Public Policy,
1999), p. 1.
31
The President’s Management Agenda,
Office of Management and Budget,
Fiscal Year 2003, p. 17, 2002.
32
Ibid, p.18.
33
E-Mail from Dan Contreras, Executive
Director of the Texas Council on
Competitive Government (CCG),
July 9, 2002.
34
Stephen Goldsmith, “Managing City
Finances: Doing More for Less,” in
The Entrepreneurial City: A How-To
Handbook for Urban Innovators, (New
York: Center for Civic Innovation,
Manhattan Institute for Public Policy,
1999), p. 2.
35
Donald P. Moynihan, The State of
the States in MFR, A Report of the
Government Performance Project,
The Maxwell School’s Alan K.
Campbell Public Affairs Institute at
Syracuse University, 2001, p. 30.
36
The programs are, respectively, the
Smart Jobs program at the Texas
Department of Economic
Development and the Skills
Development Fund at the Texas
Workforce Commission.
37
Carole Keeton Rylander, “Smaller,
Smarter, Faster Government:
Recommendations of the Texas
Comptroller,” e-Texas Report, issue
WF-1, vol. 2, pp. 91-97.
38
Ibid, p. 97.
39
Carole Keeton Rylander, “Smaller,
Smarter, Faster Government:
Recommendations of the Texas
Comptroller,” e-Texas Report, issue
ED-4, vol. 2, p. 21.
40
William D. Eggers, “The Wonder
Down Under,” Government Executive,
March 1997, p.38.
41
Crisis in State Spending: A Guide for
State Legislators, American Legislative
Exchange Council, January 2002, p. 12.
42
Karen Robb, “OMB To Crack Down
on IT Systems Standards,”
FederalTimes.com, July 1, 2002.
43
John Hood, Don Carrington, and
Roy Cordato, “Executive Summary,”
in Changing Course: An Alternative
Budget for North Carolina, John
Locke Foundation, May 2001, p. 9.
18
44
Charles Mahtesian, “Higher Ed: The
No-Longer Sacred Cow,” Governing,
July 1995, www.governing.com.
45
Steve Kolodney, interview with the
Author, May 2001.
46
Tod Newcombe, “The Disappearing
Data Center: Government
Consolidates Big Iron,” Government
Technology, January 1999.
47
Carole Keeton Rylander, “Smaller,
Smarter, Faster Government:
Recommendations of the Texas
Comptroller,” e-Texas Report, issue
GP-3, vol. 1, p. 200.
48
Ira Sager, “Big Blue Gets Wired,”
Business Week E.Biz, April 3, 2000,
p. EB 99.
49
Drew Robb, “Plugging in to
Electronic Procurement,” Government
Technology, September 2000, p. 80.
50
As opposed to “forward auctions,” in
which buyers bid against each other
for an item until the highest bidder is
left standing.
51
Ron Bell, Department of General
Services, State of Virginia, interview
with the author, June 28, 2001.
52
Desiree de Meyer,”Speed Up
Financial Reporting,” Special Report:
Payback, SmartBusinessMag.com, May
2001, p.56.
53
David Rocks, “The Net as a Lifeline,”
Special Report: Saving Money on the
Web, BusinessWeek e.biz, October 29,
2001, p.EB 23.
54
Renuka Rayasam, “Tame Travel
Expenses,” Special Report: Payback,
SmartBusinessMag.com, May 2001,
p.59.
55
Desiree De Myer, “A Smarter Way to
Stay Smart,” SmartBusinessMag.com,
May 2002, p.48.
56
Ira Sager, “Big Blue Gets Wired,” p.99.
57
G. Christian Hill, “Dog Eats Dog
Food. And Damn if It Ain’t Tasty,”
eCompany Now (now Business 2.0),
November 2000.
58
Most of these savings are in cost
avoidance. See: Don Steinberg,
“Share Knowledge (Ignorance Costs
Millions),” SmartBusinessMag.com,
May 2002, p.52.
59
Gary Ankabrandt, Pennsylvania
Department of General Services,
interview with the author, July 2001.
60
David Osborne and Peter Plastrik, The
Reinventor’s Fieldbook: Tools for
Transforming Your Government (San
Francisco: Jossey-Bass, 2000), pp. 77-78.
61
The overwhelming majority of
these savings came from cost
avoidance, as opposed to hard budget
savings. Source: “Transforming State
Government,” New Century
Colorado, June 2000, Executive
Summary, pp. 1-3.
62
Penelope Lemov, “Deficit Deluge,”
from Governing’s May 2002 issue,
http://www.governing.com/
5deficit.htm.
63
Structural imbalances will also be
the subject of future ALEC studies.
The American Legislative Exchange Council’s Tax and Fiscal Policy Task Force develops policy to
reduce excessive government spending and lower the overall tax burden. Its legislative members
have been at the forefront of developing sound, free-market tax and fiscal policy. The Task Force has
developed budget reform policies, tax and expenditure limitations; supermajority requirements for
tax increases, and dynamic revenue forecasting. Recent task force publications include Mid-Year
Review of State Budget Policy and Crisis in State Spending: A Guide for State Legislators.
www.alec.org
The Manhattan Institute Center for Civic Innovation (CCI) sponsors the publication of books like
The Entrepreneurial City: A How-To Handbook for Urban Innovators, which contains brief essays
from America’s leading mayors explaining how they improved their cities’ quality of life; Stephen
Goldsmith’s The Twenty-First Century City, which provides a blueprint for getting America’s cities
back in shape; and George Kelling’s and Catherine Coles’ Fixing Broken Windows, which explores
the theory widely created with reducing the rate of crime in New York and other cities. CCI also
hosts conferences, publishes studies, and holds luncheon forums where prominent local and
national leaders are given opportunities to present their views on critical urban issues. Cities on a
Hill, CCI’s newsletter, highlights the ongoing work of innovative mayors across the country.
www.manhattan-institute.org